The following table provides a security analyst's expected return on two stocks in two particular scenarios for the market return State Probability Market return Stock A return Stock B return Poor 0 25 4 5 5 3 8 Good 0 75 15 33 12 6 If the risk free rate is 5 , what hurdle rate should be used by the management of firm A for a project with the risk characteristics of firm B's stock a 10 4 b 10 8 c 12 6 d 3 8

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Question: The following table provides a security analyst's expected return on two stocks in two particular scenarios for the market return. State Probability Market return %

The following table provides a security analyst's expected return on two stocks in two particular scenarios for the market return.


State	Probability	Market return %	Stock A return %	Stock B return %
Poor	0.25	4	5.5	3.8
Good	0.75	15	33	12.6

If the risk free rate is 5%, what hurdle rate should be used by the management of firm A for a project with the risk characteristics of firm B's stock?

10.4%

10.8%

12.6%

3.8%

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